Assume that you are the accountant for Computer Consultants. Prior to this year, Computer Consultants operated out of a leased office. However, the company purchased its own office building this year. The building is in an area where real estate values have been increasing an average of 6 percent per year.
The owner of Computer Consultants has asked why you recorded depreciation on the building if real estate values are appreciating. Write a response to the owner explaining why depreciation must be recorded on the company’s accounting records.
Response to Owner
Mr. CEO,
Computer Consultants
2 October 2018
As being the accountant for the Computer Consultants, I would like to bring this to your notice that the depreciation of the building is needed to be recorded each year in the books of accounts because of the reason that the company Computer Consultants has become the owner of the asset. Depreciation is the expense which is incurred to record the constant wear and tear of the land and building which can be as per any of the depreciation methods.
You have asked why depreciation would be needed to record even when it is evident that the prices of the property are appreciating. As far as this is concerned, the appreciation of the value of the property does not have any effect on the assets books of accounts. It is because of the reason that the assets are recorded not on their current fair value, but their book value, and for this reason, the appreciation is not recorded for accounting purposes.
The main aim of ignoring the appreciation of the asset value is that it is not always certain if the value of the asset would increase or decrease regarding real estate. Because of the constant uncertainty surrounding the fair value of the real estate assets, the fluctuation requires the accountants to ignore it completely. The main accounting aim is to record the transactions to realize and identify if there has been incurred losses or profits in the given period. The changing nature of these assets can become misleading. Furthermore, it would not be prudent to constantly reevaluate the assets by their increasing or decreasing asset values. Therefore, because of this reason, the depreciation records on real estate even when the values of the assets are appreciating (Consumer Dummies, 2015).
Reference
Consumer Dummies. (2015). Starting a Business All-In-One For Dummies. John Wiley & Sons.
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